Robin Mills
The Iranian president Mahmoud Ahmadinejad chose petroleum industry managers who are close to him. Sajjad Safari / Reuters
In the Gulf of Mexico, BP is being castigated for the disastrous oil spill there.
In our region, another blowout is going on, less publicised but significant for what it tells us about the world’s fourth-largest oil producer: a murky story of politics, business and mismanagement.
On May 28, a fire broke out at the Naft-e Shahr oilfield in Iran’s Kermanshah province, near the Iraqi border, killing three people. Oil is now gushing out and the drilling rig has melted in the flames.
“The minimum time for harnessing and controlling the outburst from such a well is six months,” says Heidar Bahmani, the head of the National Iranian Drilling Company.
This accident is not so important in itself, except to the victims and their families, as it is neither affecting Iranian oil exports nor causing major environmental damage. More significant, though, it sharpens persistent questions about the management of Iran’s vast oil and gas reserves. Last week, the oil giants Shell and Repsol decided to withdraw from the Persian LNG (liquefied natural gas) project, the development of phases 13 and 14 of South Pars, Iran’s share of the world’s largest gasfield adjoining Qatar.
The US$10 billion (Dh36.73bn) contract was awarded to an Iranian consortium led by Khatam-ol-Anbia, the construction arm of the Iranian Revolutionary Guard Corps (IRGC).
Thus another tentacle of this military-industrial complex has extended into a key part of the Iranian economy.
The IRGC is already involved in a range of businesses covering somewhere between a third and two thirds of the country’s GDP. It runs Tehran’s Imam Khomeini International Airport, telecommunications, construction, military industries, ports and oil and gas pipelines.
According to the exiled dissident and former guardsman Mohsen Sazegara, the IRGC even maintains a de facto foreign ministry. But at the same time, the Revolutionary Guards are responsible for weakening the regime through huge smuggling operations, including petrol, narcotics, alcohol and Viagra.
No oil company can feel comfortable about working with the IRGC. Already targeted by a wide range of US and international sanctions, it has no compunctions about using its military might to win arguments
Continuing confrontation with the West strengthens the Revolutionary Guards’ monopoly.
Under pressure, the regime has turned ever more to the IRGC as guarantor of its survival. In return, IRGC insiders are enriched through a shadowy network of front companies and ostensibly charitable foundations.
This strategy is becoming increasingly dangerous. Control over Iranian oil has often determined the fate of the country’s leaders.
Mohammad Mossadegh, the Iranian prime minister in the early 1950s, nationalised the industry in 1951 but was undermined by an international boycott of oil exports, while the 1978 oil workers’ strike was the final nail in the Shah’s coffin.
But a capital-intensive and technically challenging industry such as petroleum cannot be run by amateurs. Choosing managers on the basis of loyalty to the regime, IRGC backgrounds and closeness to Mr Ahmadinejad is a recipe for stagnation at best; disaster at worst.
Iran’s oil production has been creeping up slowly for several years, but this is little comfort in view of soaring domestic consumption.
A large part of the increase in output was accomplished in the 2000s by western companies such as Shell, Total and Italy’s ENI, the contracts for which are now expiring. And new Iraqi developments will increasingly compete for OPEC quotas.
Although Iran holds the world’s second-largest gas reserves, its export projects have proceeded at a funereal pace and it runs short of gas for its own people during cold winters. Talk of major imports from Azerbaijan suggests pessimism about future domestic output.
It remains to be seen how Khatam-ol-Anbia will fare with South Pars LNG. These highly complex projects, requiring sanctioned technology, large amounts of financing and sophisticated commercial arrangements, have almost exclusively been the preserve of the international oil majors.
Even relatively straightforward oil developments and gas pipelines have been subject to interminable delays.
Iran has already missed the boat at a time when Qatar cashed in on record natural gas prices, which have now dropped. And going it alone on LNG misses out on valuable trading and arbitrage opportunities.
For a petro-economy such as Iran’s, handing control to a shadowy state within a state carries two major risks.
The first is that of a famine amid plenty: continuing mismanagement, corruption, accidents and underinvestment, leading to economic paralysis and energy shortages. The severe structural weaknesses of Iran’s petroleum sector will become more glaring if oil prices fall.
The second is that the notional rulers of the country come to find they are not in charge. But only a major change of government can reverse the increasing power of the military.
Ayatollah Ali Khamenei, the supreme leader, seems happy to use the IRGC to defend himself against his opponents, while Mr Ahmadinejad’s term still has three years to run.
Americans are increasingly angry about the spill in the Gulf of Mexico, but BP is at least a real oil company. Iranians should be even angrier about the mismanagement of their natural resources.
As fast as oil leaks from Naft-e Shahr, money goes up in smoke even faster.
Robin M Mills is a Dubai-based energy economist and author of The Myth of the Oil Crisis
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